Earnings Call: Q3 2018

Nov 13, 2018

Ladies and gentlemen, welcome to the PSP Swiss Property Q3 Results 2019 Conference Call. I am Maria, the Carsco operator. I would like to remind you that all participants will be in listen only mode and the conference is being recorded. After a short introduction, there will be a Q and A session. The conference must be recorded for publication and broadcast. At this time, it's my pleasure to hand over to Mr. Giacomo Vazarini, CEO. Please go ahead, sir. Yes. Good morning to everybody, and welcome to this Q and A call. As we do it typically for Q1 and Q3, we provided this morning with the Q3 results, which contained updates on our letting activities, on our development projects, on valuation changes, which happened in the quarter, and we updated our guidance with regard to the vacancy, lowering the year end expectations to 5% and confirming our EBITDA guidance at CHF240 1,000,000. I think this is, in our view, a good set of results, especially the reduction of the vacancy guidance, which comes really much in line with letting activities is something which we were working for and looking towards. And therefore, I would open to Q and A call now and leave all the other statements for later. The first question comes from Gisela Buri, ZKB. Please go ahead. Mrs. Bourie, we can now hear you. I'm sorry, this must have been a mistake. I didn't press star 1 on purpose. I'm sorry. No problem. Thank you very much. Next question comes from Robert Wertman, Kempen. Please go ahead. Good morning. This is Robert. Guidance for vacancy down, much appreciated. Can you tell us what is actually changing in the rental market? And I'm referring to incentives, but also rents. And perhaps also very interesting to see where the demand is coming from. As a follow-up question, does this mean you want to go up the risk curve, I. E, starting new developments at spec or potentially buying more vacancies? This is the first part. Well, I think towards the midyear compared to the midyear, the market didn't substantially change. We see a good demand at the central locations of Zurich. We see good demand picking up in the West. And the guidance improvement from midyear towards the year end to the Q3 comes predominantly from letting success in the Richty Park, letting in the Grosspater Tower and then several letting in Geneva. So I think this is a continuous result of our improvements of our focus or and I would also say of the determination of the asset management and property management and the letting team. With regard to the incentives, especially in parts of the CBD of Zurich and parts of Zurich West, we see that we are getting a little bit more power. But I would say you don't see that yet in change of incentives. It's a bit of comfort that we have more potential tenants lining up. And therefore, we are in a slightly better position in negotiation. But I wouldn't say that, that changes yet the landscape of the incentives, which are not dramatic, so unchanged, I would say, of course compared to the half year. The demand comes from a variety of sectors. Clearly, in Zurich, it's a technology, a fee sector, but also health care, it's Tate University, it's still banking, Basel continues to be pharmaceutical, and we are signing always very digitally, but we're signing also some co working spaces where it adds flexibility to the building as we did it in the Grosspeter tower during the Q3. With regard to the question of the risk curve, clearly no. I think we continue on our path on trying to work on the vacancy, try to anticipate expiries. As you know, we have continuous expiries of 12% to 15% of our book. And we have our development pipeline. We will continue to execute diligently. Plus, we are working on a few projects we have in the portfolio, and we should eventually be able to release a bit of information with the full year results of 'eighteen, but we are definitely not moving up the risk curve. Okay. That is clear. And then the question is why? Because if I see where the demand is coming from, and you mentioned actually pretty much the entire economy or almost. So you could argue that it's quite a widespread extra demand. What would then not be a reason to go on the risk curve? Well, if we look at the few development projects which we look, we have still the impression that you're not paid for the risk, that the yields are still very low. So if you move up the risk, you should also be paid for that extra risk you take, and that's something we are not really observing in the market. Okay. Okay. So actually, you see that I reckon pension funds and insurance companies are also willing to go higher up the risk curve and underwrite more aggressively than you? Well, one has also said there are not so many transaction either. So I wouldn't say that in that way. It's just that I think the market is improving, but it's not so strong and returns are not there yet where one would say, well, it's worth to go this extra risk in the cases we observe. Okay. And then if you look at the transaction markets and more generally talking about transactions? Or is it pretty much same old and still very, very limited? No, it's similar to 2017. We are looking at a few opportunities, but it's still not a very liquid market because it's easy. The owner of the assets, they have an issue with what is the alternative use of the capital. So I think the appetite to dispose and to realize is there, but the problem is where to invest the funds. So that triggers clearly that good assets in good locations are still scarce. Okay. That's good. Then last question. One of the goals for you was lowering the vacancy. Now you're expect to get 5% at the end of the year, pretty close to, I would say, some kind of a structural vacancy level. So what will be the focus, let's say, beyond 2018 for you? As I said at the beginning, clearly, the aim was to reduce the vacancy. We always said we want to reduce the vacancy on a diligent and intelligent way. I think we have still vacancy in the portfolio. We have expiries, which might add some vacancy. We have our development projects. We don't feel under pressure to invent something just for doing something. We continue in our path. I think that the geopolitical environment is also not so bright that you can go really in other direction. So we continue to focus on our work. And with regard to 2019, we will communicate with our 2018 full year results. Excellent. Much appreciated. Thank you very much. Thank you, Robert. The next question comes from Ken Cogarell, ZKB. Please go ahead. Yes, good morning, everyone. I would have three questions. The first one is also related to vacancies. How much of the reductions are due to the sales and the expected sales of buildings in 2018? And where do you see the structural vacancy going forward? I mean, the clinic assumed that 5% would be it, but I guess you could be lower. If you could get lower, what's your view there? Thank you. With regard to sales, we communicated already beginning of the year that the building in Geneva contributed roughly 1, 1.2 percentage points to the vacancy reduction. Then you have Berenstrasse Sud, which will add roughly 0.2 percentage points, and that's about it for this year. And then depending if Freeburg is going to be sold in the Q1 of next year, this will add also a few basis points to the vacancy reduction. The big part was Avenida de Morgin in Petitlosi in Geneva, which we also think clearly communicated the mid year. With regards to the structural vacancy, I think on a €7,500,000,000 portfolio, we always said that there is a structural vacancy of 5% to 6%. I think important is that we showed that we were able to reuse it and that we can explain if vacancies goes up, why they go up. So you can never exclude that vacancy goes up 1% to 7%. Important is that we can explain it and that we show the measures to bring it further down. Not saying that I have EBITDA now that we'll go up there, but we always said a portfolio like ours should have a structure vacancy on average of 5% to 6%, which demonstrates the quality of the portfolio. Okay. Thank you. The second one is relating to co working spaces. We're hearing more and more that the new tenants for many property owners are co working spaces. What are the risks related to that? And did you see some areas where they didn't perform so well? Yes. I think one has to be a bit careful and differentiate when we talk about co working tenants. And especially, it's a phenomena which in Switzerland is not yet so strongly present compared to the observation you have perhaps more in the Anglo Saxon world. We have a few relationships with co working providers, which goes from serviced offices, high end serviced offices to communities. These are typical lease agreements on a fixed term basis, 5 to 10 years at market rents with no turnover and clearly, the usual guarantees you would have with another tenant. One could argue that there is an imbalance between our engagement with the tenant, which is on a 5 or 10 year basis and engagement of the tenant with his clients, which is then on a 1, 3 or 6 month basis. I think this is a fair statement. This is something which we clearly monitor, and we consider what is the business model and what is the survival change of that business model in that area. So we look at it as a business, as a tenant, which has a value add also to building, but which has to be profitable in itself. So that's a bit the judgment we take with every tenant. And we see it really as a flexibility to the building. And we don't have lease agreements where you have only turnover basis, where you have provided full fit outs and you go into the risk. We said midyear also that we have in the Ristipark in Volysellen a situation where we have a lower base rent and a step up and a turnover base because we wanted to bring in movement in that area, and we see that there is an increased demand. In class, in those situations, you can go with that route, but we are very careful on with whom we work, on what terms we work and what the business model is. And on the portfolio, we are still in a 1% to 2% rental income phase compared to the world client base, So it's still marginal. Thank you very much. And the last one is actually related to Stage 1 of Banoff K Platts. You were writing there that the buildings will be restored based on the previous appearance. Does that mean the inside of the building as well? Or where does this discussion currently stand? Is it finalized now? Or can you increase the floor utilization or anything like that? If there would be any updates, that would be appreciated. Thank you very much. Yes. Thank you, Ken. Well, we send out the property news. If you back, we expect that we should be able to keep the facade and that we will rebuild the building. Once we are able to go in clearly together with the building protection authority, we will see what can be kept and what is still there and what can be rebuilt. At the end, the building will be most likely inside modern or more modern and more efficient. On the other hand, we have a lease agreement, a tenant agreement, which we intend to fulfill. So therefore, I would say we should have pretty much the same building as before, 1.5 years latest from today's perspective. Thank you very much. Thank you. The next question comes from Marc Vies, Merckie Baumann. Please go ahead. Good morning. My question is about the delay in rental income from the Barnoff Gayside. Is there any insurance covering for the delayed rental income or how we have to handle this topic? Thank you. Yes. Thank you, Mark. It's also something, if I recall well, we said midyear that we have a or with the announcement of the fire, not midyear, but in August, that we have an insurance covering clearly the building, the site and we have a business interruption insurance, which covers the loss of rental income of that building. For a period of time, we should fit to delay we currently envisage of the rebuilding. So we can take in account the expected rental income then? Under the assumption that we are able to restore the building in the time frame we currently envisage, yes. Okay. Thank you. Thank Mr. Bolzarini, there are no more questions. Well, thank you all to everybody. I appreciate these questions, and I think that we have to opportunity to have this Q and A call, and I wish everybody a successful year end rally. Merry Christmas and Happy New Year. We might be the first saying that, and talk to you all in February. Thank you. Bye bye. Ladies and gentlemen, the conference is now over. Thank you for choosing Chorus Call and thank you for participating in the conference. You may now disconnect your lines. Goodbye.